Spurred by such selling, muni performance is set to trail stocks, commodities, Treasuries and corporate bonds this year, according to data compiled by Bloomberg and Bank of America Merrill Lynch. Munis have declined 0.9 percent, after adjusting for the volatility in trading, the numbers show.
The diminished chance that Congress may succeed in rewriting the tax code may help municipal bonds. David Litvack, head of tax-exempt bond research at U.S. Trust, a New York-based unit of Bank of America Corp., said the advantages of municipal bonds may become more apparent as investors file their taxes for 2013, when the top tax bracket rose.
“We don’t see much incentive in an election year for politicians to compromise,” Litvack said. “Barring an unexpected sweep by the Democrats in the House of Representatives so that they would get a majority, we don’t see the same thing happening for the next two years as well.”
Danger Diminished
There are other obstacles. Senate Finance Committee Chairman Max Baucus, who has led efforts to change the tax code, is becoming ambassador to China. His counterpart in the House, Ways and Means Committee Chairman Dave Camp of Michigan must step down in 2014 because of Republicans’ six-year term limit for committee leaders. The budget agreement signed by Obama, which fixes spending targets through fiscal 2015, has also removed pressure to deal with spending.
John Dillon, head of muni strategy at Morgan Stanley Wealth Management in Purchase, New York, said the market’s dominant concern is the threat of rising interest rates, which would reduce the value of outstanding bonds. Still, he said, the diminished risk to the tax exemption should help demand.
“It don’t think the threat goes away, but it’s mitigated for 2014,” he said.
In trading yesterday, the interest rate on AAA 10-year local securities was 2.93 percent, little changed from Dec. 27, according to Bloomberg data. The ratio of the yield of munis to U.S. Treasuries of comparable maturity, a measure of relative value, was about 98.6 percent, near the lowest since June. It compares with a five-year average of 102 percent. The smaller the number, the more expensive munis are compared with federal securities.